Exactly why the small cap run continues

The Wall Street Journal ran a story this morning that cracked me up. The run of small caps beating large caps has ended because large caps outperformed over the past 5 weeks. Right. Hmm, how many times the since the end of 1999 did small caps lag for one month? 32 times. What about two months in a row? 12 times. Back in the middle of last year, the S&P 500 beat the Russell 2000 for five months in a row.

Plus, as I noted back in March on the blog, this five weeks is historically when large caps are at their best versus small caps. The problem for large caps is that when they beat small caps, as they frequently do, the margin is smaller than when they lag. A quick spreadsheet shows the average beat is 2.6 percentage points and the average lag 3.3 points. How much did they outperform by in this past 5 week period that the Journal likes so much? 2 percentage points, the paper says. As I noted in my magazine story, also in March, more people calling for the end of the small cap rally doesn't mark the end of the rally. By several measures, small caps are just getting back to their average valuation versus large caps aftert large caps had their huge run in the 1980s and 1990s.